Harry First ‘Excessive Drug Pricing as an Antitrust Violation’ (forthcoming on the Antitrust Law Journal)

In the US, there have been antitrust enforcement efforts against various pharmaceutical practices that elevate price above the competitive level, such as reverse payments (or pay-for-delay), product hopping, and collusion among generic drug manufacturers. However, the conventional wisdom is that U.S. antitrust laws do not forbid high prices simpliciter.

This paper argues that the conventional wisdom may be mistaken:

Section 1 engages in a general discussion of the problem of high prices and provides two examples of a non-antitrust approach to this problem.

The standard antitrust/welfare economics paradigm condemns high prices at least on the grounds of resource misallocation and deadweight welfare loss. Many scholars go beyond deadweight welfare loss concerns, condemning monopoly pricing because of the redistribution of the consumer surplus from consumers to producers, but some are indifferent to this redistribution. There is an additional argument that can be made against high prices, but it is one to which antitrust is often indifferent: high prices can be seen as unfair in certain situations

The law is rich with efforts to deal with this problem of fairness, and many of these efforts far predate the elaboration of welfare economics. The common law imposed duties of reasonable pricing on those who pursued “public” or “common callings,” such as innkeepers, carriers, ferrymen, and even surgeons. This legal response to high prices has taken a number of other forms.

The author identifies two particular situations which he thinks are relevant to drug prices: shortages during World War I and electric utility surge pricing. These situations provide a number of relevant lessons: (i) whether seen as a constitutional or a policy matter, some guideposts are necessary when prohibiting excessive prices, although these guideposts need not be spelled out in a statute but can come from business practice and court decisions;(ii) legislators’ willingness to protect consumers from excessive pricing does not depend on the existence of monopoly power as that concept has come to be applied in antitrust cases; (iii) there is a rich history of using basic law enforcement tools to attack excessive pricing; and (iv) Government intervention, if properly done, can correct market imperfections by establishing rules that produce better results.

Section 2 then focuses on the current antitrust approach to excessive pricing and the assumed inapplicability of Section 2 of the Sherman Act to a monopolist’s excessive pricing.

The conventional wisdom in antitrust is that monopoly pricing is not a violation of Section 2 of the Sherman Act unless accompanied by an element of anticompetitive conduct. Charging monopoly prices is not only “not unlawful,” the Supreme Court wrote in Trinko, “it is an important element of the free-market system.” The opportunity to charge monopoly prices, “at least for a short period” incentivizes the risk taking “that produces innovation and economic growth.”

Nonetheless, the author argues that closer examination of this line of authority suggests that excessive pricing could satisfy the monopolistic conduct requirement. In fact, there is no case holding that a monopolist’s conduct in raising its price to an excessively high amount, or even that the charging of a monopoly price, is lawful under Section 2. To make his case, the author reviews Supreme Court cases said to support the view that monopolistic pricing simpliciter does not infringe antitrust law – in particular, linkLine and Alcoa. He concludes that these court decisions, carefully read, do not actually reject Section 2 liability for excessive pricing, even if commentators have readily taken the view that monopoly pricing is lawful under Section 2. Instead, they deal with exclusionary practices which led to high prices.

Section 3 compares the antitrust approach to excessive pricing to how U.S. courts and enforcers have handled standard essential patent licensing.

One reason why courts should reconsider the ready assumption that Section 2 does not reach excessive pricing is because the US actually condemns high prices in many areas of antitrust law. This is particularly the case with the licensing of standard essential patents (SEPs) that carry a commitment to license on fair and reasonable terms (FRAND), where high prices have been asserted as a type of competitive harm.

Standards have been adopted through the efforts of private industry standard setting organizations (SSOs) and have been particularly important in high technology industries, such as electronics and communications equipment. Once a standard is set, implementers of that standard are likely to make substantial investments in standards-compatible products and to become effectively locked into the standard. Absent a FRAND commitment, patent holders could exploit (hold-up) licensees for high royalties, not because of the intrinsic innovative value of the patent but because of the value of the investments that the potential licensee has made.

FRAND commitments have frequently led to litigation where the focus has been on high prices as a competitive harm, although the antitrust cases are often framed around what might be seen as enabling conduct in order to avoid tackling directly the legality of the excessive pricing. This is apparent in a number of cases, such as Broadcom v Qualcomm (where the district court found that Section 2 was breached by Qualcomm’s deceptive behaviour, but the court’s focus was on the ill effects of Qualcomm’s high pricing), and FTC complaints in N-Data and Google/Motorola which focused on the higher prices caused by the relevant conducts.

These three cases are not direct precedent for applying Section 2 to excessive pricing; nevertheless, the animating antitrust concern of these three cases was the exploitation of consumers through the charging of high prices.

A subsequent sub-section looks at how competition law enforcers outside the United States tackle excessive pharmaceutical drug pricing as an abuse of dominance.

The United States is an outlier in the world in its view that a monopolist’s conduct in pricing excessively is not an antitrust violation. Jurisdictions that sanction excessive pricing include the EU, China, India, South Africa, Israel, Korea and Japan. Despite having the legal authority to condemn excessive pricing, jurisdictions outside the United States have historically been quite cautious in attacking high prices. Most competition authorities will only exceptionally enforce this type of provision, preferring to focus on exclusionary practices.

“Only exceptionally,” though, is not never. In fact, competition agencies have become increasingly active in pursuing excessive pricing cases, particularly in pharmaceutical pricing. The author here provides brief overviews of the Aspen case in Italy and of the subsequent investigations by the European Commission and South Africa; of recent enforcement action brought in China; and of the Pfizer/Flynn case in the UK.

Section 4 then looks at three US examples of excessive pricing of pharmaceutical drugs, arguing that excessive pricing could be the basis of antitrust liability under Section 2 in each case.

The discussion focuses on increases in the price of three drugs (Daraprim, Calcium EDTA, and EpiPen) that share certain common traits and which the author thinks are the most obvious targets for antitrust enforcement because of high prices. The purpose of the discussion is to isolate some indicative factors relevant to an analysis of excessive pricing in this area, approaching the analysis of this conduct as one would approach any Section 2 monopoly case, that is, through the rule of reason.

All these cases concern drugs which have long been out-of-patent and regarding which there is a price spike—either sharp or gradual, but always substantial—unexplained by anything other than opportunistic behaviour. Second, the price increase is so substantial as to likely be unrelated to the cost of production, including any possible “reasonable” return on investment. Third, new entry did not occur despite the price increase, nor was there any indication that new entry was likely within any reasonable time.

The paper then concludes.

The author argues that the only obstacle to pursuing excessive pricing cases in the US is a mistaken consensus regarding what the law is. It follows that the obstacles are not legal, but a matter of policy. This policy, in turn, rests on three beliefs—that entry will take care of monopoly pricing faster than judicial intervention; that it is too difficult to determine what price is “excessive”; and that it is unduly interventionist to remedy that problem in an antitrust court.

The entry argument is the weakest of the three. Economics scholarship has questioned assumptions about easy entry generally in the economy, and as regards pharmaceutical drugs in particular. In the three cases examined in this article, entry has either been difficult or non-existent.

The other two concerns are more difficult to address.

Figuring out when pricing is excessive is hard, but it can be arguably solved under the general rule of reason framework used in Section 2 cases. The three case studies presented earlier (as well as the European cases) can help isolate some of the indicative factors that might show excessive pricing. These factors would include: (1) the timing of the price increase (whether as an immediate price spike or a more gradual increase), which creates an inference of anticompetitive effect; (2) the amount of the increase over previous prices; (3) whether the price increase was opportunistic as opposed to being based on changed cost factors or the need to reward investment in risky enterprise; (4) the relationship of price to an appropriate benchmark (cost of production or a relevant comparator, such as the price in a different geographic market); (5) the potential impact on innovation (which will vary depending on the product and the industry); and (6) the conditions of entry and other structural aspects of the market.

Each factor includes a large element of judgement, but that is deemed acceptable in many judicial determinations. Furthermore, enforcement agency guidelines, policy statements, or even rule-making, could provide further guidance.

The third problem is that of remedy. How can courts or agencies write an injunction that tells defendants how they cannot price in the future? What sort of remedy will an enforcement agency seek that can avoid casting courts in the role of price regulator tasked with monitoring a defendant’s pricing? Perhaps the most that can be said here is that courts and agencies have faced similar problems in other types of pricing cases, such as predatory low pricing, but those problems have not been considered a reason to disable courts or agencies from considering such claims.

Every proposal advanced in this area has problems and it is doubtful that any one proposal will be the solution. However, the real mystery is why the US has taken antitrust law off the table. Unless it prefers to do nothing at all, the US should embrace the opportunity to use antitrust law this way, making it truly a “consumer welfare prescription”.

Comment:

I am unable to comment on US law, and thus on the main issue addressed by the article: whether US antitrust law could condemn excessive pricing simpliciter. Even assuming the author is correct, I would expect this approach to have low chances of prevailing in federal courts.

This does not detract from the value of the author’s proposal. The article is also interesting in how it borrows from EU Law to identify both the main issues that antitrust enforcement against excessive prices would raise in the US and ways to address such issues. On the one hand, I think this is a good example of the use of comparative legal analysis; but, on the other, this approach also provides a good example of the limitations of such analyses. For example, it is clear that European solutions cannot be imported wholesale to the US. From an institutional standpoint, competition agencies could be thought to have better resources to identify excessive prices than courts, for example. From a legal design perspective, one can only wonder what would be the impact of claimants being able to ask for treble damages regarding high pricing practices – particularly on potential defendants’ business conduct and on the courts who would need to determine what part of a price is excessive.

However, such questions would only have to be addressed if the author’s main argument in this piece prevails. I admit I would like to see it tested.